In this article, we will discuss Currency Depreciation. So, let’s get started.
Currency Depreciation
- Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
- In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.
- Rupee depreciation means that rupee has become less valuable with respect to dollar.
- It means that the rupee is now weaker than what it used to be earlier.
- For example: USD 1 used to equal to Rs. 70, now USD 1 is equal to Rs. 76, implying that the rupee has depreciated relative to the dollar i.e. it takes more rupees to purchase a dollar.
- Some of the factors that influence the value of a currency:
- Inflation
- Interest rates
- Trade deficit
- Macroeconomic policies
- Equity market
- Currency depreciation increases a country’s export activity as its products and services become cheaper to buy.
- The RBI intervenes in the currency market to support the rupee as a weak domestic unit can increase a country’s import bill.
- There are a variety of methods by which RBI intervenes:
- It can intervene directly in the currency market by buying and selling dollars.
- If the RBI wishes to increase the rupee value, then it can sell dollars and when it needs to bring down rupee value, it can buy dollars.
- The central bank can also influence the value of rupee by the way of monetary policy.
- RBI can adjust the repo rate (the rate at which RBI lends to banks) and the liquidity ratio (the portion of money banks are required to invest in government bonds) to control rupee.
